Wesfarmers downgraded to 'sell' after cash splash

Misa Han

Wesfarmers shares have been hit with multiple downgrades, as analysts look past the generous payout that sparked a rally on Wednesday and focus on the tough operating environment several of the conglomerate’s divisions are facing.

The conglomerate, whose business spans from coal to supermarket, reported net profit after tax of $2,689 million, up 18.9 per cent from 2013. It lifted its dividend to almost $3.4 billion and reported a $1.1 billion profit from the sale of its insurance arm.

Wesfarmers shares spiked 3.8 per cent on Wednesday as investors warmed to the cash splash, but the shares were down 1.3 per cent at $45.06 in early trade on Thursday.

Despite the huge payout, Deutsche Bank downgraded the stock from ‘hold’ to ‘sell’ on Thursday, highlighting the tough outlook for Target, and the Chemicals, Resources and Industrial & Safety divisions.

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The outlook remained “less upbeat than usual” for even the stronger Coles division, with the management calling out an intensively competitive environment and value conscious consumers, it said.

Bank of America Merrill Lynch downgraded the shares to ‘underperform’, noting the share price reaction was primarily driven by the $1.1 billion selloff of the insurance division.

A price-to-earnings ratio of 22x was too expensive for a company that sold businesses and returned capital, with no growth options, it said.

It said four out of seven Wesfarmers divisions faced earning risks in 2015. The coal division was facing the threats of lower coal prices while chemicals had to deal with the increased costs of gas and the loss of carbon abatement income. Industrial and safety profit margins were likely to be hit by the flat outlook for future mining activity and manufacturing.

The outlook for Target remained poor in the struggling discretionary retail environment in Australia, the analysts said.

Credit Suisse also downgraded from ‘neutral’ to ‘underperform’, with a target price of $45.25.

But JP Morgan offered a slightly more positive view on Wesfarmers, retaining its neutral rating on the back of $1.1 billion capital management and strong growth outlook for the key Coles and Bunnings divisions.

It noted despite a “somewhat stretched valuation”, Coles turnaround can continue to ride on its supply chain and liquor sales and Bunnings supported by strong sales and capital recycling.